Notes of Inter-Corporate Loans Chapter 10 CS Executive Company Law

Inter-Corporate loans

Loans and Investments by Companies [Section 186]

Restriction on investment through investment companies [Subsection 1]
A company shall not make investment through more than 2 layers of investment companies.

Exceptions
The provisions of this sub-section shall not affect,—

  • a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond 2 layers as per the laws of such country;
  • a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law for the time being in force.

Note:

  • Layers means tiers.
    • Suppose XYZ Ltd. is the subsidiary of ABC Ltd. Here we can say that XYZ Ltd. is the 1st layer subsidiary of ABC Ltd.
    • Further, suppose PQR Ltd. is the subsidiary of XYZ Ltd. Here we can say that PQR Ltd. is the 2nd layer subsidiary of ABC Ltd.
  • Investment Company means a company whose principal business is the acquisition of shares, debentures or other securities and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than 50% of its total assets, or if its income derived from investment business constitutes not less than 50% as a proportion of its gross income.
  • Above restriction is applicable in case of investment through ‘Investment Companies’ only; not on investment through any non-investment company.
  • Through above restriction, the intention of government is to prevent the companies from routing funds through complex web of subsidiaries. This restriction makes tracing of ‘track of funds’ easy.

Restriction on providing loans, guarantees and investment [Subsection 2]
No company shall directly or indirectly —

  • give any loan to any person or other body corporate;
  • give any guarantee or provide security in connection with a loan to any person or other body corporate; and
  • acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding

  • 60% of its paid-up share capital, free reserves and securities premium account or
  • 100% of its free reserves and securities premium account,
    whichever is more.

[Explanation.—For the purposes of this sub-section, the word “person” does not include any individual who is in the employment of the company]

Note:

  • Paid up share capital includes both equity and preference share capital
  • “Free Reserves” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend [Section 2(43)]
  • According to a circular of MCA (Circular No. 04/2015 dated 10th March 2015),
    • loans and/or advances made by the companies to their employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013, if such loans/advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated.

SR required to provide loan or guarantee etc. above the limited specified [Subsection 3 read with Rule 13]
Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified under sub-section (2), no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting: 

Provided that

  • where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or
  • where acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company,

the requirement of this sub-section shall not apply:

Provided further that the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided under sub-section (4)

A resolution passed at a general meeting in terms of sub section (3) of section 186 to give any loan or guarantee or investment or providing any security or the acquisition under sub section (2) of section 186 shall specify the total amount up to which the Board of Directors are authorised to give such loan or guarantee, to provide such security or make such acquisition.

Disclosure of investment by the company in the financial statement [Subsection 4]
The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.

Consent of all the directors present at the BOD meeting required for investment [Subsection 5]
No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting.

Consent of public financial institution required for investment [Subsection 5]
No investment shall be made or loan or guarantee or security given by the company unless the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained:

But prior approval of a public financial institution shall not be required where
 the aggregate of

 

 

the loans and investments so far made plus

the amount for which guarantee or security so far provided to or in all other

bodies corporate plus

the investments, loans, guarantee or security proposed to be made or given
 does not exceed the limit as specified in sub-section (2), and
there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.
   

 

Minimum Rate of Interest [Subsection 7]
No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.

In case of Section 8 Company, nothing contained in this sub-section shall apply to a company in which 26% or more of the paid-up share capital is held by the Central Government or one or more State Governments or both, in respect of loans provided by such company for funding Industrial Research and Development projects in furtherance objects as stated in its memorandum of association.

No loan or security if default subsists in the repayment of any deposits [Subsection 8]
No company which is in default in the repayment of any deposits or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.

Register of Loan, Guarantee or Security [Subsection 9]
Every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register which shall contain such particulars and shall be maintained in such manner as may be prescribed.

Rule 12 of Companies (Meetings of Board and its Powers) Rules, 2014

(1)    Every company giving loan or giving guarantee or providing security or making an acquisition of securities shall, from the date of its incorporation, maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made as aforesaid.

(2)    The entries in the register shall be made chronologically in respect of each such transaction within 7 days of making such loan or giving guarantee or providing security or making acquisition.

(3)    The register shall be kept at the registered office of the company and the register shall be preserved permanently and shall be kept in the custody of the company secretary of the company or any other person authorised by the Board for the purpose.

(4)    The entries in the register (either manual or electronic) shall be authenticated by the company secretary of the company or by any other person authorised by the Board for the purpose.

(5)    For the purpose of sub-rule (4), the register can be maintained either manually or in electronic mode.

(6)    The extracts from the register may be furnished to any member of the company on payment of such fee as may be prescribed in the Articles of the company which shall not exceed Rs. 10 for each page.

 

Inspection of Register [Subsection 10]
The register shall be kept at the registered office of the company and —

  • shall be open to inspection at such office; and
  • extracts may be taken therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed.

Non-applicability of this Section/Exemptions [Subsection 11]
Nothing contained in this section, except sub-section (1), shall apply—

  • to any loan made, any guarantee given or any security provided or any investment made by
    • a banking company, or
    • an insurance company, or
    • a housing finance company in the ordinary course of its business, or
    • a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;
  • to any investment—
  • made by an investment company;
  • made in shares allotted in pursuance of Right Issue;
  • made, in respect of investment or lending activities, by a NBFC registered with RBI and whose principal business is acquisition of securities.

Penalties [Subsection 13]
If a company contravenes the provisions of this section,

  • the company shall be punishable
    • with fine which shall not be less than Rs. 25,000 but which may extend to 5 lakh and
  • every officer of the company who is in default shall be punishable
    • with imprisonment for a term which may extend to 2 years and
    • with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 lakh.

Exemption from Applicability of Section 186 to Government Company
In view of the Central Government’s notification dated 5th June 2015 under Section 462 of the Companies Act, 2013, Section 186 shall not apply to:

  • a Government company engaged in defence production;
  • a Government company, other than a listed company, in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security or making any investment under the section.

Note: Except the government companies falling under the above mentioned conditions, all other companies are required to comply with the provisions of Section 186. In cases where there is no share capital, computation shall be based upon the free reserves of the company, if any.

Loans to Directors [Section 185]

Subsection 1
No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—

  • any director of company, or of a company which is its holding company or any partner or relative of any such director; or
  • any firm in which any such director or relative is a partner.

Subsection 2
A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that—

  • a special resolution is passed by the company in general meeting:
    Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and
  • the loans are utilised by the borrowing company for its principal business activities.

Explanation.—For the purposes of this sub-section, the expression “any person in whom any of the director of the company is interested” means—

  • any private company of which any such director is a director or member;
  • any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
  • any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Exceptions [Subsection 3]
Nothing contained in sub-sections (1) and (2) shall apply to—

  • the giving of any loan to a managing or whole-time director—
       – as a part of the conditions of service extended by the company to all its employees; or
    – pursuant to any scheme approved by the members by a special resolution; or
  • a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan; or
  • any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
  • any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:

Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.

Penalty [Subsection 4]
If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,—

(i)

the company shall be punishable

 

with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees;

(II)

every officer of the company who is in default shall be punishable

 

with imprisonment for a term which may extend to 6 months or

with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees; and

(III)

the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable

 

with imprisonment which may extend to 6 months or

with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees, or

with both.

     

Section 186 compared with Section 185
It should be noted that the provisions of Section 185 of the Companies Act will be applicable in case a loan guarantee or security is provide by the company to its director or any other person in whom the director is interested. Whereas the section 186, prescribe the limits up to which the company can make Loans and investments.
Further, Loans and advances made by the companies to their employees, other than managing and whole time directors are not governed by the requirement of Section 186 of the Act, if such loan/advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy of the company if any.

INVESTMENTS TO BE HELD IN COMPANY'S OWN NAME [Section 187]

According to Section 187(1), all investments made or held by a company in any property, security or other asset shall be made and held by it in its own name.

The requirement that the investment made by the company must be held in its own name is confined to only those investments which are made by it on its own behalf and not on behalf of someone else. In a case where the company is a trustee, the investment is supposed to be made on behalf of the beneficiaries of the trust and not on its own behalf. Therefore, the investments by the company as a trustee and held in the name of the beneficiaries is allowed.

As per proviso to section 187(1), the company may hold any shares in its subsidiary company in the name of any nominee or nominees of the company, if it is necessary to do so, to ensure that the number of members of the subsidiary company is not reduced below the statutory limit.

Exemptions from applicability of Section 187(1)
In terms of the provisions of Section 187(2), Section 187(1) does not prevent a company:

  • from depositing with the bank, being the bankers of the company, any shares or securities for the collection of any dividend or interest payable thereon; or
  • from depositing with, or transferring to, any person any shares or securities, by way of security for the re-payment of any loan advanced to the company or the performance of any obligation undertaken by it.
  • from holding investments in the name of a depository when such investments are in the form of securities held by the company as a beneficial owner.

REGISTER OF INVESTMENTS NOT HELD IN COMPANY’S OWN NAME
According to sub-section (3) of section 187 where in pursuance of clause (d) of sub-section (2), any shares or securities in which investments have been made by a company are not held by it in its own name, the company shall maintain a register which shall contain such particulars as may be prescribed and such register shall be open to inspection by any member or debenture-holder of the company without any charge during business hours subject to such reasonable restrictions as the company may by its articles or in general meeting impose.

Companies (Meetings of Board and its Powers) Rules, 2014
Rule 14 of Companies (Meetings of Board and its Powers) Rules, 2014 states the following:

  • Every company shall, from the date of its registration, maintain a register in Form MBP 3 and enter therein, chronologically, the particulars of investments in shares or other securities beneficially held by the company but which are not held in its own name and the company shall also record the reasons for not holding the investments in its own name and the relationship or contract under which the investment is held in the name of any other person.
  • The company shall also record whether such investments are held in a third party’s name for the time being or otherwise.
  • The register shall be maintained at the registered office of the company. The register shall be preserved permanently and shall be kept in the custody of the company secretary of the company or if there is no company secretary, any director or any other officer authorised by the Board for the purpose.
  • The entries in the register shall be authenticated by the company secretary of the company or by any other person authorised by the Board for the purpose.

PUNISHMENT
According to section 187(4), if a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

Related Party Transactions

Meaning of Relative Party [Section 2(76)]
“Related party”, with reference to a company, means—

  1. a director or his relative;
  2. a key managerial personnel or his relative;
  3. a firm, in which a director, manager or his relative is a partner;
  4. a private company in which a director or manager or his relative is a member or director;
  5. a public company in which a director and manager is a director and holds along with his relatives, more than 2% of its paid-up share capital;
  6. any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
  7. any person on whose advice, directions or instructions a director or manager is accustomed to act:
    Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
  8. any body corporate which is—
    • a holding, subsidiary or an associate company of such company;
    • a subsidiary of a holding company to which it is also a subsidiary; or
    • an investing company or the venturer of the company;
      Explanation.—For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.
  9. such other person as may be prescribed;

Related Party [Rule 3 of the Companies (Specification of Definitions Details) Rules, 2014]
For the purposes of sub-clause (ix) of clause (76) of section 2 of the Act,

  • a director (other than an independent director) or KMP of the holding company or his relative with reference to a company, shall be deemed to be a related party.

Meaning of Relative [Section (77)] “Relative”, with reference to any person, means anyone who is related to another, if—

  • they are members of a Hindu Undivided Family;
  • they are husband and wife; or
  • one person is related to the other in such manner as may be prescribed;

List of Relatives in Terms of Clause (77) of section 2 [Rule 4 of The Companies (Specification of Definitions Details) Rules, 2014]
A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:-

(1) Father: Provided that the term “Father” includes step-father.

(2) Mother: Provided that the term “Mother” includes the step-mother.

(3) Son: Provided that the term “Son” includes the step-son.

(4) Son’s wife.

(5) Daughter.

(6) Daughter’s husband.

(7) Brother: Provided that the term “Brother” includes the step-brother;

(8) Sister: Provided that the term “Sister” includes the step-sister.

Related Party Transactions [Section 188]

Requirement of resolution at a meeting of the Board for some related part transactions [Section 188(1)]
Except with the consent of the Board of Directors given by a resolution at a meeting of the Board, no company shall enter into any contract or arrangement with a related party with respect to—

  • sale, purchase or supply of any goods or materials;
  • selling or otherwise disposing of, or buying, property of any kind;
  • leasing of property of any kind;
  • availing or rendering of any services;
  • appointment of any agent for purchase or sale of goods, materials, services or property;
  • such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
  • underwriting the subscription of any securities or derivatives thereof, of the company.

Note:

  • Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

 

Requirement of approval of the company by a resolution in certain cases [Proviso 1 to Section 188 read with Rule 15 of Meetings of Board and its Powers Rules, 2014]
Except with the prior approval of the company by a resolution, a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into,—

a.as contracts or arrangements with respect to clauses (a) to (e) of section 188(1), with criteria as mentioned below –
 isale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to
 ·         10% or more of the turnover of the company
iiselling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to
 ·         10% or more of net worth of the company
 as mentioned in clause (b) and clause (e) respectively of section 188(1);
iiileasing of property of any kind amounting to
 ·         10% or more of turnover of the company
 as mentioned in clause (c) of sub-section (1) of section 188;
ivavailing or rendering of any services, directly or through appointment of agent, amounting to
 ·         10% of the turnover of the company
 as mentioned in clause (d) and clause (e) respectively of section 188(1)
Explanation.—It is hereby clarified that the limits specified in sub-clauses (i) to (iv) shall apply for transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.
b

is for appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding 2.5 lakh rupees as mentioned in clause (f) of section 188(1); or

 

cis for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding 1% of the net worth as mentioned in clause (g) of section 188(1).
Note:
No member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.
  ·         This condition is not applicable in case of private companies.
 ·         Further, this condition is not applicable to a company in which 90% or more members, in number, are relatives of promoters or are related parties.
Requirement of passing the resolution at the general meeting of the company shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders of holding company at the general meeting for approval.
No requirement to pass resolution in the general meeting in following cases:
  ·         a Government company in respect of contacts or arrangements entered into by it with any other Government company;
  ·         a Government company, other than a listed company, in respect of contracts or arrangements other than those referred to in clause (a), in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, of, as the case may be, the State Government before entering into such contract or arrangement

Non-applicability of provisions of Sub Section 1
Nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business if such transactions are on arm’s length basis.

Meaning of office or place of profit
The expression “office or place of profit” means any office or place—

  1. where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
  2. where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

Meaning of arm’s length transaction
The expression “arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

Disclosure in Board’s Report [Section 188(2)]
Every contract or arrangement entered into under sub-section (1) shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.

 

Provision of ratification of related party transactions in Board’s Meeting or General Meeting within 3 months [Section 188(3)]
Where any contract or arrangement is entered into by a director or any other employee,

  • without obtaining the consent of the Board or approval by a resolution in the general meeting under sub-section(1)

and if it is not ratified

  • by the Board or, as the case may be,
  • by the shareholders at a meeting

within 3 months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board or, as the case may be, of the shareholders and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

Recovery of Loss in Related Party Transaction [Section 188(4)]
Company may proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.

Punishment [Section 188(5)]
Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall,—

(i) in case of listed company, be liable to a penalty of Rs. 25 lakh and
(ii) In case of any other company, be liable to a penalty of Rs. 5 lakh

Information to the Board for Related Party Transactions [Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014]
The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-

  1. the name of the related party and nature of relationship;
  2. the nature, duration of the contract and particulars of the contract or arrangement;
  3. the material terms of the contract or arrangement including the value, if any;
  4. any advance paid or received for the contract or arrangement, if any;
  5. the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
  6. whether all factors relevant to the contract have been considered , if not ,the details of factors not considered with the rationale for not considering those factors; and
  7. any other information relevant or important for the Board to take a decision on the proposed transaction.

ROLE OF AUDIT COMMITTEE IN RELATED PARTY TRANSACTIONS

According to Section 177(4)(iv) of the Companies Act, 2013, the terms of reference of Audit Committee shall include approval or any subsequent modification of transactions of the company with related parties;
Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;
Thus, it is the responsibility of audit committee to approve the transactions of the company with related parties.

Rule 6A of Companies (Meeting of Board and its Powers) Rules, 2014
The audit committee may make omnibus approval for all related party transactions proposed to be entered into by the company subject to the following conditions, namely 

  1. The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include the following, namely:
    • maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year;
    • the maximum value per transaction which can be allowed;
    • extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;
    • review, at such intervals as the Audit Committee may deem fit, related party transaction entered into by the company pursuant to each of the omnibus approval made;
    • transactions which cannot be subject to the omnibus approval by the Audit Committee.
  2. The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely:-
    • repetitiveness of the transactions (in past or in future);
    • justification for the need of omnibus approval.
  3. The Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company.
  4. The omnibus approval shall contain or indicate the following:-
    • name of the related parties;
    • nature and duration of the transaction;
    • maximum amount of transaction that can be entered into;
    • the indicative base price or current contracted price and the formula for variation in the price, if any; and
    • any other information relevant or important for the Audit Committee to take a decision on the proposed transaction:
      Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may make omnibus approval for such transactions subject to their value not exceeding Rs. 1 crore per transaction.
  5. Omnibus approval shall be valid for a period not exceeding one financial year and shall require fresh approval after the expiry of such financial year.
  6. Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

Provisions under SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015

Meaning of related party transaction
According to Regulation 2(1)(zc) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, “related party transaction” means a transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.

Meaning of related party
According to Regulation 2(1)(zb) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015,  “related party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards.

Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party.

Meaning of relative
According to Regulation 2(1) (zd) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 “relative” means relative as defined under Section 2(77) of the Companies Act, 2013 and related rules.

Provisions to be complied with in case of related party transaction: Regulation 23 of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 provides that:

  1. The  listed entity shall formulate a policy on materiality of related party transactions and on  dealing  with  related  party  transactions including  clear  threshold  limits  duly  approved  by  the  board  of  directors  and  such  policy  shall  be  reviewed  by  the  board  of  directors at least once every 3 years and updated accordingly:
    Explanation – A transaction  with  a  related  party  shall  be  considered  material  if  the transaction(s) to be entered into individually or taken together with previous transactions  during a financial  year, exceeds 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

    (1A)Notwithstanding the above, with effect from July 01, 2019, a transaction involving  payments  made  to  a  related  party  with  respect  to  brand  usage  or  royalty  shall  be  considered material  if  the  transaction(s) to  be  entered  into  individually  or  taken  together  with  previous transactions during  a  financial  year,  exceed 5%  of  the  annual  consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.
  2. All related party transactions shall require prior approval of the audit committee
    Provided  that  only  those  members  of  the  audit  committee,  who  are  independent directors, shall approve related party transactions.

  3. Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions, namely-

    • the audit committee shall lay down the criteria for granting the omnibus approval in  line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature.

    • the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity;

    • the omnibus approval shall specify:

      1. the  name(s)  of  the  related  party,  nature  of  transaction,  period  of transaction, maximum amount of transactions that shall be entered into,

      2. the indicative base price  / current contracted price and the formula for variation in the price if any; and

      3. such other conditions as the audit committee may deem fit:
        Provided  that  where  the  need  for  related  party  transaction  cannot  be  foreseen  and  aforesaid  details  are  not  available,  audit  committee  may  grant  omnibus approval for such transactions subject to their value not exceeding  Rs. 1  crore per transaction.

    • the audit committee shall review, at least on a quarterly basis, the details of related party  transactions  entered  into  by  the  listed  entity  pursuant  to  each  of  the  omnibus approvals given
    • Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year:

  4. All  material  related  party  transactions  shall  require  approval  of  the  shareholders  through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not:
  5. The provisions of sub-regulations (2), (3) and (4) shall not be applicable in the following cases:

    • transactions entered into between two government companies;

    • transactions entered into between a holding company and its wholly owned subsidiary whose  accounts  are  consolidated  with  such  holding  company  and  placed  before  the shareholders at the general meeting for approval.

  6. The provisions of this regulation shall be applicable to all prospective transactions.

  7. For the purpose of this regulation, all entities falling under the definition of related parties shall not vote to approve the relevant transaction irrespective of whether the entity is a party to the particular transaction or not.

Provisions under SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015

Every company shall maintain one or more registers in Form MBP 4, and shall enter therein the particulars of—

  • company or companies or bodies corporate, firms or other association of individuals, in which any director has any concern or interest, as mentioned under sub-section (1) of section 184:
    Provided that the particulars of the company or companies or bodies corporate in which a director himself together with any other director holds 2% or less of the paid-up share capital would not be required to be entered in the register;
  • contracts or arrangements with a body corporate or firm or other entity as mentioned under sub-section (2) of section 184, in which any director is, directly or indirectly, concerned or interested; and
  • contracts or arrangements with a related party with respect to transactions to which section 188 applies.

The entries in the register shall be made at once, whenever there is a cause to make entry, in chronological order and shall be authenticated by the company secretary of the company or by any other person authorised by the Board for the purpose.

After entering the particulars, such register or registers shall be placed before the next meeting of the Board and signed by all the directors present at the meeting.

Duty of directors to disclose to the company the particulars specified in Section 184(1) required to be included in the register
Every director or key managerial personnel shall, within a period of 30 days of his appointment, or relinquishment of his office, as the case may be, disclose to the company the particulars specified in Section 184(1) relating to his concern or interest in the other associations which are required to be included in the register.

Preservation of Register
The register shall be kept at the registered office of the company and the register shall be preserved permanently and shall be kept in the custody of the company secretary of the company or any other person authorised by the Board for the purpose.

Right of member to demand extracts from such register
The company shall provide extracts from such register to a member of the company on his request, within 7 days from the date on which such request is made upon the payment of such fee as may be specified in the articles of the company but not exceeding Rs. 10 per page.

Register to be produced at the commencement of every AGM
The register to be kept under this section shall also be produced at the commencement of every AGM of the company and shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting.

Penalty
Every director who fails to comply with the provisions of this section and the rules made thereunder shall be liable to a penalty of Rs. 25,000.

Exemptions
Provisions of this section shall not apply to any contract or arrangement—

  • for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed five lakh rupees in the aggregate in any year; or
  • by a banking company for the collection of bills in the ordinary course of its business.

Further, in case of section 8 Companies provisions of this section shall apply only if the transaction with reference to section 188 on the basis of terms and conditions of the contract or arrangement exceeds Rs. 1 lakh.

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